The rotation towards defensive sectors in July did not align with our scenario. However, we are sticking to our cyclical allocation despite renewed tensions in Iran. Corporate earnings remain strong, and too many interest rate hikes are already priced in.
Author: Roger Rüegg
The price of Brent crude oil temporarily surged to nearly USD 100 due to renewed tensions in Iran. As a result, global bond yields have risen sharply, in some cases exceeding April’s highs. However, inflation expectations have barely reacted compared to the first oil shock, making this a rise in real yields.
In the US, 10-year real yields are now at 2.4%, close to the peaks of 2023. We consider this very attractive. The situation in Iran is likely to ease, especially with the US midterm elections approaching in November. Oil prices are expected to fall back to around USD 70 in the medium term, which should ease pressure on yields.
We are therefore maintaining an overweight duration and are not making any adjustments to bonds. We believe the two to three rate hikes priced in by the Fed and ECB are excessive.
Equity markets have so far weathered the sharp rise in real yields well and have barely reacted to the rise in oil prices compared to March. This is despite the technology sector currently being under pressure due to skepticism about high AI investments and the pricing in of more rate hikes.
The equity market has thus far withstood emerging headwinds. We remain constructive, even though we see more hurdles compared to the previous month. Earnings growth remains historically strong (+23% in Q2), margins are high (20% EBIT margin in the MSCI World), companies are low in debt, the global economy continues to deliver positive surprises, and sentiment is not euphoric.
Additionally, we see signs that AI investments are already bearing fruit. For instance, Alphabet grew its cloud business by 80% year-on-year, and Gemini’s user numbers are rising sharply. We believe the current skepticism is likely temporary. We are therefore maintaining a slight overweight in equities, focusing on tech and cyclical stocks, and are not making any changes.
The action is currently in commodities. However, we are maintaining a neutral position on the sidelines for now. Oil price volatility is very high, and although we expect a lower oil price, a rise to around USD 120 cannot be ruled out. Additionally, agricultural prices are rising due to dry weather, and industrial metals are also not unattractive. We remain neutral on gold. While the USD 4,000 mark seems to hold despite rising real yields and a stronger USD, the technical outlook remains weak, and we expect a correction towards USD 3,700.
However, we believe the medium-term story for gold remains intact, and the Chinese central bank has resumed its strategic gold purchases. We are waiting for a better entry point for purchases. We are making one change in real estate: we are moving to an underweight position in listed Swiss real estate funds.
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